American Vanguard Corporation (AVD) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm Eric Wintemute, Chairman and Chief Executive Officer of American Vanguard Corporation. I will be the acting Chairman of today's meeting. It's my pleasure to welcome all of you. It is 11 a.m. on June 2, 2021. And in accordance with the notice of the meeting, I call to order the 52nd annual meeting of shareholders. As you know from our proxy materials, this is a virtual shareholders meeting and is accessible only by webcast. For stockholders who are participating on this webcast, please feel free to submit any questions that you may have for me, the Board, our officers, using the instruction on the meeting portal, and we will try to answer at the end of our normal proceedings, which should be in about 30 minutes. With me by phone today is our entire Board of Directors. In person, we have our CAO, Tim Donnelly. Tim Donnelly, secretary of the company, will now report on the mailing of the notice of this meeting and the presence of a quorum.

This meeting is held pursuant to a printed notice mailed on or about April '21, 2021, to each stockholder of record on April 9, 2021, who is entitled to vote. Our proxy distribution agent, Broadridge, has attested to such mailing. Further, a list of stockholders entitled to vote at this meeting has been available at the company for the past 10 days and is available at the meeting for examination by any stockholder desiring to do so. All the documents concerning the call and notice of the meeting will be filed with the record of the meeting. According to our account, immediately prior to the commencement of the meeting, 26,832,444 shares of the company's voting capital stock were present in person or by proxy. This is about 90% of the outstanding voting stock of the company.

Okay. Based upon the percentage of the total shares of the company held by holders of record now present at the meeting either in person or by proxy, a quorum is present. On behalf of the Board of Directors of the company, I would like to express my appreciation to all stockholders who returned their proxies. This meeting is now duly convened for the purposes of transacting business properly before it. I would also like to point out that most of you who returned proxies had authorized the persons named in the proxy to vote on all propositions coming back before the meeting. While we urge stockholders to allow their proxies to stand, any stockholder may revoke his or her proxy and vote via the webcast connection today. If you wish to vote or to revoke and change your vote, please do so now by following the instructions on your computer. [Voting]

At this point, I would like to turn to the executive presentation. Before I begin, I ask that Tim please provide our standard cautionary reminder regarding forward-looking statements. Tim?

In today's call, the company may discuss forward-looking information. Such information and statements are based upon estimates and assumptions by the company's management and are subject to various risks and uncertainties that may cause actual results to differ from management's current expectations. Such factors can include weather conditions, pandemics, changes in regulatory policy, competitive pressures and various other risks as detailed in the company's SEC reports and filings. All forward-looking statements represent the company's best judgment as of the date of the call, and such information will not necessarily be updated by the company. Eric?

Thank you, Tim. And leading into our first slide here. The last 1.5 years has been quite a challenge for us. We've -- what's shown here is Tim, our CAO, who headed up our pandemic working group, which was formed, I think it was March 15 of last year, it's a lot that we've gone through. We've kept our company safe. We've been able to perform and continue to supply and operate our facilities, take care of our customers. And it's been quite an ordeal and a challenge that I'm very proud of the way, Tim, you help steer us through this time. I'm also pleased to say that today is the first time that our Board is going to be together in person. We're in a building next to our headquarters here, and we'll be holding our Board of Directors meeting live for the first time in several periods. So with that, so I've been with the company a long time, and we kind of started kind of with organic growth. We had some products, and kind of built along those lines, we expanded into doing tolling for the major companies. I guess you would kind of say those are a little bit of kind of like partnerships or alliances. But we kind of fell into a track in the late '80s of acquisitions of branded products that the larger companies, as they trim their sales, look to divest. And from that, we wound up also licensing technology. We did acquire SmartBox in 2000, which, along with a couple of other closed delivery systems, led us into the precision ag with SIMPAS, which I'll talk about in a little bit. And then also, I'm going to focus a little bit on biologicals as well because that has kind of unfolded, not without thought, but certainly in an area of growth that we didn't quite envision when we first got into the space. So we've acquired a number of companies along the way, but currently, this is what we've got under our umbrella. AMGUARD is kind of our newest name. That's our non-crop business, which, again, now is growing. We have really kind of TyraTech, Envance, OHP and AMGUARD kind of under one umbrella. And then I will talk a little bit about our 2 most recent acquisitions, AgNova and Agrinos in a moment. So geographically, we obviously focused in U.S. and Northern America, I guess, for much of our history, including Mexico. But we branched out in a fairly significant way in Central America. We then acquired into Brazil and launched a beachhead there. Australia, we made a recent acquisition, which has given us the platform we need there as well. And Agrinos has put us into China and India and Eastern Europe in addition to the other spots that we've already located. So if you look across the geographies, you'll see kind of the key areas of growth of what we see are going to drive our business going forward. You'll see in quite a few of these that SIMPAS, which is our precision ag and prescriptive ag and biologicals are a strategic role for us going forward. So our international business, which going back 7 years was just about 25% of our business. Really, in '17 as we made company acquisitions, we've grown, and you can see from the orange bar how that's moved up over time. And it's a trend that we will continue to see, although we expect our domestic business to grow significantly as well. So if you go back, I took over CEO in '94. You can see the relative size of the equity company. And I think proud of the team for what they've been able to accomplish over the years, kind of strong, steady growth that -- for shareholders' equity, which is of interest to our shareholders. So over the last 50 years -- and actually Durham Chemical, which is the basis of the company that we have today, was acquired by American Vanguard in 1971. American Vanguard itself was formed in '69. But -- so really, over the last 50 years and I would say the 8 company acquisitions have largely been over the last 4 years, 5 manufacturing plants that we've acquired in addition to the historic Los Angeles facility, starting with our Alabama facility, which is our biggest manufacturing site that occurred in 2001. We had 4 other plants that we required since then. Our delivery systems, in addition to the SmartBox, there's also Lock 'n Load and EZ Load. Again, this is early closed delivery system technology, which is a strong interest for applications as far as safety and sustainability. And then the product acquisitions and certainly some licensing, that has occurred at 52 from 1989 forward, it's quite a nice group of mostly niche products that command fairly high margins. We are kind of a leader in that space as the big companies trim their sales and do product life management. We've got a great opportunity to build our portfolio, and that's something that we see continuing. So we have our manufacturing sites. I mentioned Los Angeles, which has actually been there since 1945; our largest plant in Alabama that we bought from DuPont; our site in Hannibal, Missouri, which we bought in 2007 from BASF; and our plants and formulation packaging plant, both herbicide insecticide, fungicides in Marsing and Alabama. Our Marsing, Idaho, we purchased in -- try to remember what year it was, but we bought that from Bayer. And then 2 most recent acquisitions, 2 biological companies that we've bought in locations, one in Oregon and one in Mexico, to handle our biological production. From a technology standpoint, we've built a very nice world-class facility in Los Angeles, separate side from our manufacturing location. That has a great team of PhDs and chemists that are experts in synthesis and formulation technology. This has allowed us to not only improve our manufacturing but also offering more products that have uniqueness through formulation and combination products to give us a separate space from competitors. Coupling that now, we have -- with the acquisition of TyraTech, we have a research center located in RTP, North Carolina. It's a great source of area for talent. We have -- I think you're all aware of the P&G technology that they're currently going forward with. But what I'm excited about and what I was excited when I first saw the technology that these people were doing is the ability to reach outside the 25B list in addition to doing 25B to go into kind of new classes of chemistry. So starting in February of this year, we started screening compounds as a basic R&D company. So far this year, we screened over 470,000 compounds. And we have 31 new compounds that have been created 200 leads that was promising, and we use this as our platform to build, hopefully, new chemistry that we can bring in the license that would have limited effect, if any, at all, on vertebrates. So product acquisitions continue. And just a couple of weeks ago, we announced our latest acquisition, a herbicide from Syngenta, again a portfolio rationalization that they were going through. This is a product that our team knows very well as 2 of our people: one who heads up North America, Scott Hendrix was involved in the product launch with this; and also Peter Propiglia, who heads up our product development department, worked on this compound at the very beginning as well. But a very nice addition to our sugarcane and our cotton portfolio of products. So we're very pleased to have that on board, which we take over July 1. Okay. I mentioned the product acquisitions -- I mean the company acquisitions, the 2 that we did most recently. AgNova gives us really a strong base in Australia. It's an area where we've been selling for probably 40, 50 years but never quite had strength to go direct, and we're going through agents. But this is a great company, AgNova, that we've been working on for a couple of years before we actually were able to put the deal together. But a great group of people, great organization, and we're seeing some very nice, strong effects from that so far this year. Okay. I'm going to shift now to biologicals. Again, this is a space that we kind of backed into. We had some strategies that Bob Trogele, our COO, had talked about is this is a space we need to get into. I was a little hesitant because I've seen hundreds of, not billions of, dollars go into research in this area and not much really from a profitability standpoint being generated. We had a growth summit 2 years ago in Costa Rica after we acquired the Brazilian entity, Defensive/Agrovant, and brought our global teams together to talk about what are the best opportunities for growth. And it surprised me and certainly our U.S. group who had seen a lot of experience with biologicals that didn't perform that were not accepted by standard practices in the U.S. But our team in Mexico, our team in Central America and our newly acquired team in Brazil all talked about how they saw a great future for biologicals. So with that encouragement, Bob has kind of moved forward in a couple of different areas, and Biotor was picked up with a license agreement from them from Central America. People who was in investment with Bob recommended we make in that kind of platform in Europe. We have kind of the rights to market in the Americas. We've got a product that we just now have gotten registered, and so we will be moving forward with that. Greenplants came to us also with our Central America acquisition. And then the technology that is there with TyraTech and Envance is, again, off of 25B list, which are kind of plant extracts. But this is -- we've now grown that into a different direction. With Iowa State and other universities, we're doing collaboration with their work as well. And so the pieces have just kind of come together very nicely. So why interest in -- so right now, way outpacing crop protection, looking over the next 5 years at almost 10% annual growth rate. So it's a space that, I think, finally, is hitting its stride. Certainly, the demand for biologicals that work and that can deliver return on investment fit very well. And for a lot of products, the prescriptive ability, to be able to apply these can make a whole new area of market for products that maybe aren't proned or well suited to be applied across the whole field. So then up comes Agrinos. And again, that was fortuitous. We were fortunate enough to purchase this at a very low rate out of bankruptcy. They had spent $200 million over a period of about 8 or 9 years and had developed some great products, lots of patents, but the revenue had not developed as much as what was envisioned, and they have a pretty big footprint of what they were trying to accomplish with their portfolio. So the 2 manufacturing sites, this is a multiplication plant or fermentation facility up in Oregon, located there for the quality of the water. But beautiful facility, recently constructed. And then down in Mexico, located near the Baja C, where they take shrimp carcasses and extract, tighten and build a nutrient base out of that extract. So this is becoming really important for us going forward. We have over 80 solutions now when we countered everything up at this point. We have close to 70 patents and about another 100 that are pending between what we've got going at TyraTech and Agrinos. And so not only do we have unique products, but we've also got IP around a lot of them. Okay. Sorry, I will now kind of shift over to line subject matter, precision ag. So as fast as biologicals are said to grow, the precision ag space is looking to grow at even a faster rate of 13% over the next 6, 7 years. And so the space is there. A lot of money has been spent, and a lot of effort put into data collection and data organization. But again, our space with SIMPAS, I think, is -- kind of stands out in that its ability to prescriptively buy products in the field with multiple products. So exciting space for us, certainly. I don't have to go back. Sorry, went backwards instead of forwards. Okay. I think you all know what SIMPAS stands for at this point. And again, the whole concept here is delivering the right product at the right place at the right rate at the right time. And this is a picture of this year's production or this year's field work with the -- with our SIMPAS system. Again, this will go on any brand of planter, so it's universally available to all markets. So another sector of this, which is really pretty exciting, is the whole sustainability that precision ag presents. The concept of carbon credits has been pushed. It looks like that's going to be managed in the U.S. by USDA. But this is what I think will be a global adoption, encouraging farmers to reduce carbon emissions through a variety of different ways. But the bottom line is that in order to apply and get your credit, you're going to need some sort of third-party measurement, a record and a validation, and that's something that we feel SIMPAS is in a very unique position on top of everything else that it does that it can help farmers measure and be able to apply and receive carbon credits going forward. So with that, Nick, can you... [Presentation]

Okay. And I should mention that we have met with USDA. EPA is certainly aware of the system as well, but we think USDA would be driving the bus and kind of gone through this, and it looks very, very encouraging as they look again on the traction here. Okay. And of course, this fits very well into our ESG platform based on the sustainability, our green solutions. I think growers are, as part of their sustainability model, continuing to look for improved plant and soil health that will drive yields rather than going to more acres and hectares of farming. So the real drive here is for efficient land that can continue to prosper year-over-year. The biologicals, we think, will play a very nice role in that as far as soil health is concerned. And of course, again, we couple that with our prescriptive delivery, and we think we've got a great platform for American Vanguard. Okay. So to wrap up, I had this slide at the last -- I mean last month. But what are we looking at in 2021 for the first time in a number of years? We've got some tailwinds. So we're looking at low double-digit growth margins, similar to last year's operating expenses, though they will increase. We feel the -- we don't feel they'll increase at a level above our current operating expenses to sales. Interest expense right now for the balance of the year, we think, will be similar to 2020, although our debt may reduce. It certainly depends on the further acquisitions that we may do. I think interest rates may start creeping up in '22, but we'll see how this plays out. Tax rates, right now, we're expecting to stay similar to where we are, although that's another potential for the '22 year. And our debt-to-EBITDA ratio, we'd like to keep in that 2% to 2.5% range, and we feel comfortable we can do that. But all this means that riding up that we think net income will grow at a faster rate than our revenue. So why are these tailwinds there? Largely driven by commodity prices, and it's certainly coming out of the pandemic and shifting as restaurants open up again and the food demand shifts back to maybe more normal levels. But I think it's a result of kind of some bill tightening that occurred over the last year. The stocks and reserves of the commodities, corn and soybeans have been brought down to pretty low levels from the store. And when that happens, then the prices tend to go up. And when that does occur, of course, then our grower groups are looking to make investments to ensure the highest yields possible to make as much profit as they can. So a couple -- just wrapping up a couple of slides here just to illustrate that our industry, ag industry, is a cyclical one. It has its peaks and valleys. Typically, those are like 4-year periods, where you have commodity prices go up and then come back down as the demand gets filled and then it goes back up. But for whatever reason, and there are a variety of them, this last one was 8-year run. So really from '13 -- or '14 really to '21, it was sitting at a relatively low level. But with that, I think that this is for corn. And if you do similar with soybeans, you can see also a similar position. And so with that, again, those are kind of the tailwinds, and that kind of concludes what I was looking to say about that. Okay. So Tim, at this point, let me return back to the business at this meeting. The first item of business is the election of 9 directors to serve until the annual meeting of stockholders in 2022. To place in nomination the names of the slate of directors listed in the proxy statement, I recognize our lead director, John Killmer. John?

Mr. Chairman, I hereby nominate for election as directors of the company to serve for the terms expiring on the date of the annual meeting of the company in 2022 or until their respective successors are duly elected and qualified, those individuals identified as nominees for director on Pages 4 through 6 of the company's proxy. Once again, they are Scott D. Baskin, Lawrence S. Clark, Debra F. Edwards, Morton D. Erlich, Emer Gunter, Alfred F. Ingulli, John L. Killmer, Eric G. Wintemute and Esmail Zirakparva.

Thank you, John. You've heard the motion. Is there a second?

I second the motion.

Okay. Thank you, Debbie. I declare the nominations closed. As a matter of housekeeping, after voting has been compiled or completed on all matters on the agenda, ballots will be counted. The next matter being submitted to stockholders is the action -- for the action is the ratification of the appointment of the company's audit committee of BDO USA LLP as the company's independent registered public accounting firm for the year ending December 31, 2021. I would like to call upon Mort Mizy -- Erlich -- sorry, Mort, Chairman of the Audit Committee for the recommendation of the audit committee in this regard. Mort?

Thank you, Eric. Mr. Chairman, the audit committee was assigned the responsibility of appointing the company's independent registered public accounting firm. In its deliberations this year, the committee has worked closely and regularly with BDO, has had the opportunity to evaluate their work and has found it to be of consistently high quality. I move for the ratification of the appointment of BDO USA LLP to audit the company's financial statements for the year ending December 31, 2021.

You've heard the motion. Is there a second?

I second the motion.

Thank you. Then let us move to the next item on the agenda. Next matter being submitted to stockholders for action is an advisory vote to approve the overall executive compensation policies and procedures of the company as described in the company's proxy statement. I would like to call upon Larry Clark, Chair of our Compensation Committee, for the recommendation of that committee on this matter. Larry?

On behalf of the compensation committee, I move for advisory approval of the overall executive compensation policies and procedures as set forth in the proxy.

Thank you. You've heard the motion. Is there a second?

I second the motion.

Okay. Thank you. Then let us move to the next item of business on our agenda, the results of our balloting. At this point, your opportunity to vote has now concluded, and I call upon Tim Donnelly to report on the results of the balloting. Tim?

Yes. Thanks, Eric. The ballots have been counted. As to the first proposal regarding election to the Board of Directors for terms expiring on the date of the annual stockholders meeting in 2022, the 9 nominees named in the proxy statement received more for election than against the election. As to proposals #2 and 3, both of those proposals received the affirmative vote of a majority of the shares of common stock present and entitled to vote. Eric?

Thanks, Tim. With that, I hereby declare all 9 nominees for director named in the proxy have been duly elected to serve on the Board of Directors of the company through the 2022 Annual Stockholders Meeting. Second, the appointment of BDO USA LLP to serve as independent registered public accounting firm of the company and its subsidiaries for the year ending December 31, 2021, has been duly ratified. And our executive compensation policies and procedures as we set forth in the proxy are approved by our stockholders. At this point, I will ask if there are any questions. Seeing that there are none, there's no other business properly before us, so this concludes the 2021 annual stockholders meeting. I again would like to express my sincere appreciation to the stockholders for the support of their company. Thank you very much. This meeting is now adjourned.